Leasing vs. Buying: An Economic Perspective

Ever seen me dance? You're about to.

Being a REALTOR of 11 years, you should know that it will be a bit impossible for me to not carry some bias towards home ownership vs leasing. However, given our country's recent financial fiasco, I thought it may be time to refresh my perspective a bit.

In a recent class, I had a professor summarize the whole financial debacle by pointing out that we as a country bought into a false pretense: namely, that home ownership was less risky an endeavor than it really was. Personally, I think he's right.

How did this happen? Ultimately, I think there are a few critical downfall milestones that we completely missed. I'll try to name a few.

1) Fannie Mae and Freddie Mac - These entities were formed with the sole purpose of making capital available for the purpose of financing mortgages for lower income families. The government has always played a role in subsidizing and promoting these quasi-governmental agencies: from inception in 1938 Fannie was made a part of the Federal Home Mortgage association, a government agency, right after the great depression. In the 70's, Jimmy Carter's administration passed the Community Reinvestment Act of 1977, which made it easier for residential loans to be made in the inner cites. The Clinton and Bush administrations were both guilty of adding risk to the formula by pressing these mortgage insurance companies into covering loan packages that involved reduced credit requirements and increased loan to value ratios. Banks were then pressured to offer these products to compete and be profitable (not to let them off the hook, but... when all of your competitors are making these loans...what are you going to do)? Clearly, the government incented poor lending practices and this contributed to the trouble.

2) The Bubble (an actual bubble) - This graphic speaks for itself. Of course, it's easy to see in hind sight. But, where is the real value line now and will we ever see such a boom in prices again (or at least in our lifetime)?

3) The NOW Generation - We want things NOW. As Americans, we live in a world where nothing of significance happens anywhere on the globe without us knowing within 10 minutes. Seriously, I was looking at pictures of the Haitian wreckage within 1 hour of hearing about it the same day it happened!

So, is it any wonder why we have a harder time conceptualizing having to wait for things we want when it comes to our first car or house? Americans tend to ask why not now. I don't think that's a bad thing by any means,but we're headed into an environment where renters are going to have to wait to be buyers longer than they wanted.

Is this a bad thing?

Ultimately, I think home ownership is a good thing and I will continue to recommend it. But, the entire market will do better (experience less volatility and value destruction during down times) if we all make that decision from more of an economic perspective rather than being pulled by the emotional allure of the American Dream.

So what's the point? Take pride in the fact that you are renting. Save your money and enjoy the buying process so much more when you do finally make the move.

I'd love to hear feedback.